When I wrote on oil prices in this column two months ago, global oil prices were around $85 per barrel with a prediction of possible hikes into $90s. However what happened immediately thereafter was a sudden price drop to around $ 60 which is where we are now. The nearly 30 per cent global oil price drop is bound to trickle down to consumers in the new year when new product imports start arriving.
Two decades ago when the OPEC (Organisation of Petroleum Exporting Countries) had virtual control on oil supply, price prediction was very reliable and bankable for use by corporate and national budgetary planners. The OPEC would meet in Vienna and set price ranges within which production would oscillate.
Since then, the oil production control has significantly shifted away from OPEC with other global players and forces influencing oil supply, demand, and prices. Investments in upstream oil production determine supply, while markets ability to absorb this production determines demands. Other energy alternatives are also gradually reducing oil demand.
It is when an extreme structural imbalance between supply and demand occurs that huge price shifts occur. In 2008 when supplies were stretched by an overheated Chinese economy, prices shot to $140. When the world was over-supplied in 2014 prices collapsed to below $30.
In between the two extremes, short term influences impact prices. Geopolitical incidents, oil inventory fluctuations, and global market performance prompt price speculation by commodity traders, and this is apparently what is happening today. The world is essentially producing enough oil, and can produce more if called upon.
US President Trump has been the single most impactful game changer of global oil supply, demands, and prices in the recent months. His geopolitical influence in the Middle East, Far East and Russia is the main cause of the ongoing oil price volatility.
Trump imposed economic sanctions on Iran effective November 4 with a specific warning of “zero” Iranian oil exports. The markets feared a potential outage of 2.0 million barrels per day (bpd), and this drove oil prices to mid $80s even before the sanctions deadline date.
Simultaneously, Trump had convinced his Saudi allies to increase supply to avoid global shortfalls and pre-empt price hikes especially during the November US mid-term elections. The Saudis obliged and pumped more oil.
Then a bombshell came as Trump immediately granted sanctions waivers to key importers of Iranian oil to continue importing Iranian oil. With Iran oil still flowing, plus Saudi stepped up production, a looming global oil over-supply collapsed prices to below $60. This prompted a damage control agreement by OPEC (and Russia) to cut production by 1.2 million bpd effective January 2019, and this should prompt prices to recover, albeit quite slowly as the world is still awash with oil.
This is happening as Trump’s ongoing trade war with China is fuelling an oil demand scare which is suppressing prices. There is also fear of an economic downturn in Europe driven by the ongoing Brexit impasse, and the French socio-political pushback. Prospects of weak global economic performance have become a key oil price depressant.
It is difficult to predict where global oil price will finally settle, but it is safe to assume that we are likely to remain in the $60-70 range going forward. For Kenya, a sustained price within this range will certainly reverse the recent oil related inflation, while also strengthening the country’s balance of payments and trade.
For the Turkana Oil Project investors, what matters most is a sustained trend of price rise towards the time of first oil export via Lamu which is expected in 2022.
Preliminary indications are that the project economics are positive at $50 per barrel which makes any export prices above $60 quite welcome. When oil was discovered in Kenya in 2012 prices were above $100.
In the meantime, how President Trump plays his geopolitical and trade cards will continue to directly and indirectly impact global oil prices. However, the consolation is that Trump is generally a champion and defender of low oil prices, and he wills definitely pushback to keep them low.